Finance and Economics Discussion Series

Abstract:
In this paper we analyze the propagation of shocks originating in
sectors that are not present in a baseline dynamic stochastic
general equilibrium (DSGE) model. Specifically, we proxy the
missing sector through a small set of factors, that feed into the
structural shocks of the DSGE model to create correlated
disturbances. We estimate the factor structure by matching impulse
responses of the augmented DSGE model to those generated by an
auxiliary model. We apply this methodology to track the effects of
oil shocks and housing demand shocks in models without energy and
housing sectors.